Toning Down The Talk of (China Trade) War

By James Altucher

Everyone is going crazy about the 35% tariff President Obama is placing on tires coming out of China. But we need to relax. This is not a trade war.

William Farancz

First off, this is not a replay of the 1929 Smoot-Hawley Tariffs which launched a global trade war which helped pushed us (and then the world) into the Great Depression. Back then, the United States had the biggest trade surplus in the world. Now we have a trade deficit. In other words, we are the customer. And the “customer is always right” applies to macro-economics as much as it applies to micro-economics.

Part of our concern is that China has been dumping product in the U.S. and has already been fighting an unfair trade war. Obama is sending a warning shot, but this is by no means a war. First off, by
keeping the yuan pegged (as opposed to the Euro or Yen, which float freely) China has already been unfairly pricing their goods vis-a-vis ours and others. Second, with exports down in August 23% for China, it’s likely that just to keep current employment levels up they would have to start dumping goods (tires) on our economy, causing our workers to lose jobs unfairly.

And let’s not forget: The tariff imposed by Obama goes from 35% to 10% in three years. Again, this is a simple warning shot. It’s not a war. A war would entail tariffs on many more goods and something much more restrictive than a tariff that essentially disappears in 3 years.

Finally, everyone is saying, “China could dump dollars”. Ha! This is unrealistic:

A) They have too many of our dollars. Heck, with $2 trillion sitting in their banks they have more dollars than we have. Bernanke is almost as much the Chinese Fed Chairman as much as he’s the U.S. one. China cares more about the value of the US dollar than we do. We’re happy to devalue it and make our goods cheaper to the rest of the world.

B) The U.S. consumer is now saving money. In recent auctions they are buying more T-bills than China.

Everyone needs to back off on the word “war”. Its not a panic situation but a chess game. For me, I’ll be a buyer on any dips this might cause in the market.

Comments (5 of 12)

As a frequent traveler to China I have a hard time believing that the Yuan is artificially weak against the dollar and would rise rapidly if allowed to float freely. After converting dollars into Yuan and going shopping in China, one will quickly understand that the dollar gives no added buying power. A meal at a Chinese McDonalds is slightly more expensive than one here. Retail store prices also seem slightly higher. The only advantage from a trade standpoint of the peg is the stability of the exchange rate, but I do not believe that it is pegged to keep its value down

9:30 am September 28, 2009

jon o wrote :

It's pretty clear China are more concerned about gaining market share than worrying about the US$ holdings - that is why they continue to buy them.
And remember the Yuan is pegged to the dollar, so as the US attempts to weaken the $ the Yuan weakens with it against the euro and yen. End result....China gains market share in those areas.
The time to complain about Chinese mercantilism was at the beginning - not when you owe them $800B. (The $2 trillion often mentioned is China's total forex holdings given a $ value for easy comprehension....it is not the value of their US$ denominated hondings.)

8:21 am September 21, 2009

James Altucher wrote :

For the commenter who asked if I was smoking something. Go check out WSJ today, page one. They have the stats on how much more the US consumer is buying of T Bills than the Chinese are.

2:00 am September 21, 2009

China Will Win wrote :

The Chinese, over the last decade, have been purchasing world resources as capital for future growth.

$2 trillion is a pittance compared to the advantages of having their main competitor for these resources, the U.S., gone.

The Chinese know that keeping the Yuan depressed artificially lowers the living standards of their people. However, it also makes it easier for them to lever up on U.S. debt. What people believe are "foolish" decisions by the Chinese, could be a very well crafted time bomb.

My $0.02

2:20 pm September 16, 2009

I wouldn't worry wrote :

Hmmm. Who will win or lose in a trade war with China.
- Chinese will finally have to eat their own dog food instead of sending it here. They will either learn to be consumers of their own crap or go bust. Social turmoil would envelope China if there is a trade war; their society is held together by the communist party's stranglehold on power. Loss of financial power internally in China would mean more riots, more adulterated products, more factory closings.
- In the short run, US workers will lose because of higher prices. But in the longer term, workers will benefit as (a) more factories in the US would finally be competitive, and (b) inflation brought on by higher prices would mean more dollars flowing into US domestic production.

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